One of the more significant changes to corporate governance in the recent
Dodd-Frank Wall Street Reform and
Consumer Protection Act is the requirement, in Section 951, that all publicly
traded corporations submit executive compensation to a non-binding advisory vote
on an annual, biennial, or triennial basis. Such executive compensation advisory
vote plans—so-called “say on pay” proposals—have dominated shareholder proposal
activity in recent years. This Manhattan Institute Proxy Monitor Finding looks
at data gathered from the Institute’s ProxyMonitor.org database to examine:

Since 2008, say-on-pay shareholder proposals requiring corporations to submit
executive compensation plans to an advisory shareholder vote have constituted
over 49 percent of all executive-compensation-related shareholder proposals
brought to a vote at Fortune 100 companies. Of the 107 such proposals voted on,
fourteen were approved by a majority of shareholders, and another fifty-seven
received over 40 percent of shareholders’ votes.

A prominent feature of executive-compensation-related shareholder proposals
submitted over the last three years is the active role played by labor unions,
both public and private. The two most frequent shareholder sponsors of proposals
related to executive compensation have been the American Federation of State,
County and Municipal Employees (AFSCME), with twenty-three proposals, and the
AFL-CIO, with twelve.[1]
Overall, labor unions and their pension funds introduced 70 proposals related to
executive compensation to Fortune 100 companies since 2008, constituting over 38
percent of all identified proposals coming to a vote. Given corporate
management’s tendency to negotiate with sponsors of shareholder proposals—and
sensitivity to compensation issues—the particular focus paid by organized labor
to executive compensation buttresses the claim that unions are leveraging the
shareholder-proposal process to advance agendas which may be at odds with the
interests of other investors.[2]

b) Early
returns in 2011 say-on-pay votes

Under Dodd-Frank’s Section 951, executive-compensation advisory votes are now
mandatory for public companies. In 2011, companies with annual meetings
scheduled after January 21 must hold a vote to determine the frequency of such
votes, which under the statute can be every one to three years.

In 2011’s earliest annual meetings, shareholders have expressed some preference
for holding annual advisory votes on executive compensation. According to
shareholder-advisory firm Risk Metrics, across all large- and mid-cap U.S. companies, 62.8 percent of shareholders
have supported annual advisory votes on executive compensation.[3]

Of the four companies in the Fortune 100 to have voted on the issue thus
far—Johnson Controls (JCI), Costco (COST), Emerson Electric (EMR), and Tyson
Foods (TSN)—shareholders have supported annual advisory votes on executive
compensation at each company save Tyson, which has a dual-share structure giving
insiders effective voting control. The boards of each company had recommended
triennial votes. (The boards of the next two Fortune 100 companies holding “say
on pay” frequency votes, Apple (AAPL) and John Deere (DE), recommended that
shareholder advisory votes occur annually. Each company is holding its annual
meeting on February 23.)

With say-on-pay votes a new feature of the post-Dodd-Frank corporate governance
landscape, what topics related to executive pay might be expected to figure
prominently among shareholder proposals going forward? Among all
executive-compensation-related shareholder proposals submitted in the last three
years, apart from say-on-pay measures, eighteen garnered over 40 percent of
shareholders’ votes. These proposals included:

Proposals
to prohibit so-called “golden coffin” agreements making incentive payments to
executives after their death. Sponsors of such proposals argue that
executives, once dead, can no longer respond to incentives. Management typically
defends such contractual arrangements, agreed to before death, as key components
of competitive benefit packages—not unlike life insurance policies—that attract
and retain critical upper management.

Proposals
to limit executive payouts following change-of-control transactions. Sponsors criticize the practice of paying executives more than 2.99 times pay in
the event of a corporate change of control, as well as the practice of making
“tax gross-up payments” to eliminate taxation of such payments. Management
typically defends change-of-control payments as better aligning management’s
incentives with shareholders to seek merger and acquisition opportunities that
imperil management but increase share value. Management defends tax gross-up
payments as necessary to normalize executive pay across regimes with substantial
variation in tax treatment.

Proposals
to exclude the application of so-called “pension credits” to performance-based
executive pay. Sponsors of such proposals argue that pension-plan gains are
unrelated to corporate operations and should not factor in incentive-pay plans;
sponsors also criticize pension-plan accounting more generally. Management
typically argues that incentive-pay plans are best aligned with standard
definitions of net income consistent with generally accepted accounting
principles and Securities and Exchange Commission regulations.

Unions will likely continue to play a prominent role in advancing such
proposals. Labor unions and their pension funds sponsored thirteen of the
fifteen disclosed sponsors of non-say-on-pay executive-compensation proposals to
obtain positive votes from over 40 percent of shareholders. Such union sponsors
included AFSCME; the International Brotherhood of Teamsters; the Service
Employees International Union (SEIU) Master Trust; and public-employee unions
from Massachusetts, New York City, and
Kansas City, Missouri.
In at least some of these proposals, unions’ interests are generally adverse to
the interests of other shareholders; for instance, change-of-control
transactions typically benefit shareholders but can lead to layoffs or employee
pay and benefit modifications.

This report analyzes information gathered
from the Manhattan Institute’s ProxyMonitor.org database,
which contains information relating to
all shareholder proposals submitted for shareholder vote between 2008 and 2010,
for the 100 largest American public companies.

ENDNOTES

Evelyn Davis, the most frequent introducer of shareholder proposals overall during the period, also submitted twelve proposals related to executive compensation since 2008.